It's Halloween in Bikini Bottom, and SpongeBob has to clean the dishes in the Krusty Krab. After he finishes, he runs out of the Krusty Krab, scared of the 'Boo' sign that appeared out of nowhere in the kitchen. Mr. Krabs asks him if he wants to hear his 'annual scary story', and he does. He tells of the 'Flying Dutchman', a ghost that steals souls on Halloween. Squidward, dressed up as the Flying Dutchman, scares SpongeBob saying that he'll steal his soul. SpongeBob has a reputation for being easily scared, and is nicknamed 'SpongeBob ScaredyPants'. After being scared by Patrick, he asks him for help. They make a 'Flying Dutchman' costume, but it does not scare anyone. SpongeBob realizes that a real ghost has a round head, and he has a square one. So Patrick (with the help of a hair shaver) makes SpongeBob's head round. On the roof of the Krusty Krab where a Halloween party is taking place, they turn off all the lights (starting the episode's climax) and lower SpongeBob with a rope. The other end is tied to Patrick's waist on the roof, but when a jellyfish stings him, Patrick starts running in circles. SpongeBob is flying around inside the Krusty Krab, hitting the walls, and when he turns upside-down someone spots his square pants. Everybody laughs at him, but soon the real Flying Dutchman appears. He complains that SpongeBob's costume is insulting, and takes it off. However, he is scared by SpongeBob, whose brain is showing as a result of Patrick's shaving. Subsequently, everyone runs away, leaving SpongeBob satisfied to finally succeed in scaring people. Patrick and SpongeBob go outside and Patrick says "I think it's your pink hat", to which SpongeBob replies "Pink hat? Oh, that's not a hat, that's my brain." Patrick screams and runs away. SpongeBob yells "Don't worry, it grows back!" and the episode finishes.

In the United Kingdom broadcast of this episode, the scene depicting Patrick cutting chunks of SpongeBob’s head was cut, although it was left in on the DVD release of the episode.

When the Flying Dutchman enters there is a 'bride of Frankenstein' (dark hair with a white vertical stripe) character on the left, next to the bigger Frankenstein. Another one appears left when the green smoke emerges.

Bach's Toccata and Fugue in D minor, BWV 565 is played two times in this episode. The first time is when Patrick put his fake glasses on, and said "Let's go scare somebody!"

The Ghastly Ones sang a Halloween remix of the theme song, which occasionally is broadcast on the episode and can also be seen on the Halloween DVD.

The title theme sounds a little like Korn's Freak On A Leash beginning.